Measuring Competition in M&A Negotiations

Abstract

This paper provides novel insights about competition among bidders during the whole takeover process, its effect on offered deal premiums, bidder announcement returns, and post-bid dynamics. Exploiting a representative sample of 780 public U.S. transactions, extended with comprehensive hand-collected data from SEC filings, I find that takeover premiums are higher, the higher pre-announcement competition among bidders is. I measure competition during the private sales process with a ratio that relates the number of bids submitted to the target to the number of signed confidentiality agreements with the target, the Proposals-to-CA-Ratio. A one-standard deviation increase of this ratio corresponds to a statistically and economically significant 5.99% increase of the deal initiation premium (Eaton, Liu, and Officer (2020)), 0.87% lower announcement returns for the winning bidder in auctions, a 130% increased probability of receiving a rival bid prior to closing, and a 44.5% increased probability of cancelling the originally announced deal (measured relative to the unconditional probability). The latter two results are more pronounced if the announcement returns of the acquirer are positive, suggesting that competing bidders are lured by potentially value-increasing deals. By applying Heckman (1979) two-stage selection models with instrumented regressors, I show that my results are robust to endogeneity concerns, especially to target’s decision to initiate the deal as well as the decision of the subsequent selling procedure (auction vs. one-to-one negotiation). The advantages of this competition measure are that (1) it relies on data as reported in target firm’s official merger documents filed with the SEC, which creates a strong incentive to report truthfully, and (2) it takes the evolution of bidding into account, controlling for the number of submitted bids. I conclude that competitive private negotiations stay competitive during the public phase of the deal, and that target boards fulfill their fiduciary duties by selecting the highest-bidding acquirer.